Today’s Real Talk is a podcast designed to give you the information you need to make smart decisions about real estate and investing. Our team wants to help you understand how the real estate market works so that you can make the right decision for your needs and future. When it comes to buying a home or other property, most people will need to take out a mortgage loan. In this article, we’ll provide a basic overview of what mortgages are and how they work.
What are mortgages?
Essentially, a mortgage is a loan that is used to finance the purchase of a home. Very few people can afford to pay for a home out of pocket, so instead they enter into agreements with a bank or other lender—the buyer provides a down payment, and then the lender puts up the rest of the money to buy the property; then, the buyer pays back that loan over a set time.
What are the parts of mortgages loans?
While the above explanation seems pretty straightforward, mortgage loans are somewhat more complicated in reality, as they contain five distinct parts:
- Collateral – Collateral refers to an asset that the bank can take back if the terms of the agreement are not met. In mortgage loans, the house itself is used as the collateral, meaning that the bank can take it back if you don’t make payments on time.
- Principal – The principal is the amount of money that you borrow from the bank. If you make a higher down payment (in other words, spend more of your own money at the beginning), then your principal will be lower.
- Interest – When you borrow money, your lender will charge you a fee known as interest on top of the principal amount. The longer you go without paying off the full amount, the more interest will accumulate.
- Insurance – Mortgage insurance is typically required for low down payments (typically less than 20%), as well as FHA or USDA loans. This protects the lender if you fall behind on your payments. While this can help you qualify for a loan you may not otherwise be able to get, it will raise your monthly payments.